Bitcoin – the evolution of a digital currency

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What is Bitcoin?

Bitcoin, the most popular digital currency, emerged from a 2009 paper written by a programmer or group of programmers under the name Satoshi Nakamoto.  Satoshi left the project in late 2010 without revealing much about himself. The community has since grown exponentially with many developers working on Bitcoin. The Bitcoin network uses a public ledger to record transactions made under pseudonyms, a technological breakthrough that allows purchases and sales without using a trusted third party, such as Visa Inc. or Western Union Co.
Since Bitcoin is open, no company, country, or third party is in control of it, and anyone can participate.   It is the first decentralized peer-to-peer payment network that is powered by its users with no central authority or middlemen.

How does Bitcoin work?

Since bitcoin is like electronic cash, most purchases take place online. It’s also possible to send and receive bitcoin in person at retail shops, or anywhere else where bitcoin is accepted.

Behind the scenes, the Bitcoin network is sharing a public ledger called the “block chain”. The blockchain, which tracks who owns what, similar to how a bank tracks assets. The authenticity of each transaction is protected by digital signatures corresponding to the sending addresses, allowing all users to have full control over sending bitcoins from their own Bitcoin addresses. In addition, anyone can process transactions using the computing power of specialized hardware and earn a reward in bitcoins for this service. This is often called “mining“.

How does one acquire bitcoins?

Validity Concerns?

While a growing cadre of retailers are beginning to accept Bitcoin, recent events have underscored concerns about the viability of the currency. The governments of India, China and Russia have sought to ban or limit its use, and the Mt. Gox exchange filed for bankruptcy protection in February, 2014.

A lot of people believe that Bitcoin’s full potential hasn’t been realized yet. Aside from making relatively fast peer-to-peer transactions, there’s no good case for using Bitcoin over traditional currency for most consumers. Plus, there still isn’t a wide array of merchants that accept it. What’s more, Price volatility is another major barrier to getting consumers on board.

That might not change anytime soon. At the moment Bitcoin is mostly in the hands of speculators and investors, and they’re playing the market like traders, which drives more volatility.  The following illustrates the volatility and Bitcoin prices since its inception.

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There are clearly still a lot of concerns with the validity of Bitcoin and potential mainstream adoption of the currency, however, this Author is long Bitcoin and sees the disruptive way that it could potentially change our day to day lives.  At the very least, my opinion on the asset, is congruent with some respectable, credible early adopters.

To be clear, nothing here is a recommendation to buy or sell the security, its just my opinion on it.

Oil Squeeze – Factors related to the decline in Oil in 2014

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Oil futures are currently trading at $54.04 (12/29/14 – 11:16 am CST) and it’s hard to even gauge where the bottom might be. Back in June, 2014 Oil was trading at $107 and has over the past 6 months taken quite the beating of approximately 50%.  Some of the global implicit factors suppressing the market price of oil are:

(1)  Demand is low because of weak economic activity, increased efficiency, and a growing dependence away from oil to other fuels.

(2) Turmoil in Iraq and Libya has not affected their output.

(3) America has become the world’s largest oil producer. Though it does not export crude oil, it now imports much less, creating a lot of spare supply.

(4) The Saudis and their Gulf allies have decided not to sacrifice their own market share to restore the price. Saudi Arabia can tolerate lower oil prices quite easily. It has $900 billion in reserves.

Clearly market forces that affect supply and demand are all that matters.  Industry experts are left befuddled  as they exclaim “We’re at the stupid range,” Stephen Schork, editor and founder of The Schork Report, said in an interview with CNBC.  “We don’t know how much lower oil can go,” Schork said. “It’s similar to 2008 when we knew oil at $120, $130 and $140 made no sense, but high prices became the reason for higher prices. It’s the same thing in reverse.”

Is $40-45 a barrel a realistic scenario? Time will tell but as for now, if we’re not driving around a Tesla or a Prius we are still happy to see this:

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TESLA – Volatility & Manipulation

Tesla ($TSLA) has been a phenomenal company to follow, largely because of the creativity, conviction, intellect and drive of their employees and CEO Elon Musk.  Business students years from now will have case studies on how Mr. Musk almost went broke, but managed to turn both his companies; SpaceX and Tesla around to formidable powerhouses in modern society.  He amongst Jeff Bezos and Jack Ma are who we will consider elite CEO’s of our generation.

Regardless of management talent, I want to highlight how TSLA has traded and manipulated from 10/27/14 – 10/29/14.  So the story goes like this, on October 27, 2014 at 11:03 a.m. the wire gets a hold of a story by the Wall Street Journal, which cites WardsAuto.com as a source saying that Tesla Sales Down 26% through September vs prior year.  The obvious happens in light of this information and this stock just caters about 9% to close below $222.  That might be only $10 swing you say, however that swing represents approximately $1.5 billion in market cap. (as of 10/31/14)

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About 9-10 hours after close of trading, a little past midnight on 10/28/2014  Elon Musk tweets this:

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The next morning, $TSLA has a huge day and closes up above $242.5.  It’s like nothing happened, well almost. Here’s a theory, that article was fabricated and leaked out to the masses intentionally so that some individuals could get that price around $220 or make everyone else fill their stops.  Obviously this could all just be a mere coincidence and a tale of a financial journal rushing to get the news out first regardless of credibility.  Time will tell as the Company has an earnings release coming up.

Obviously, nothing here is a recommendation to buy or sell the security, it just an example of how volatile equities can become in our world of real-time information, regardless of whether the information is accurate or not.

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Disruptive Companies & Their Impact on Value – UBER Example

Disruptive companies aren’t new.  These commercial entities tend to innovate and cater to customer needs in anticipation of their needs.  Who would have thought online dating could evolve to what it has now.  Who would have thought that mobile advertising could legitimately provide an alternate platform versus traditional t.v.  What would the world look like if there was a majority of  driver-less cars on the roads? What if drones could deliver our groceries and amazon purchases  and perhaps even registered mail?  “A disruptive innovation is an innovation that helps create a new market and value network, and eventually disrupts an existing market and value network (over a few years or decades), displacing an earlier technology.”

When we try and assess what value a potential disruptive company could be, we inherently have to start and assess where the business is in its life cycle and analyze the information available to us.  The potential impact of the probability of this company displacing earlier industry models is what we are essentially trying to figure out.

The Uber Example

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Uber is a venture-funded startup and transportation network company based in San Francisco, California, that makes mobile apps that connect passengers with drivers of vehicles for hire and ridesharing services.[1] The company arranges pickups in dozens of cities around the world.[2] Cars are reserved by sending a text message or by using a mobile app—the latter can also be used by customers to track their reserved car’s location.[3]

Aswath Damadoran – a finance professor at NYU’s Stern School of Business, published an article  for his own blog titled “A Disruptive Cab Ride to Riches: The Uber Payoff.”  Let’s start with the largest assumptions of his analysis and contrast that with another individual; Bill Gurley, a General Partner at Benchmark Capital and an actual investor in Uber.  Mr. Gurley responded to Mr. Damodoran’s analysis, in a blog titled “How to Miss By a Mile: An Alternative Look at Uber’s Potential Market Size

The largest point of contention is each individual’s take on (1) the size of the total available market (TAM) and (2) Uber’s likely market share.

Damodaran estimates that the global taxi and limo market is worth about $100 billion per year, but according to Gurley Uber isn’t just trying to displace the existing industry – he aims to illustrate a structured look at how traditional human car transportation can change as a result of today’s technology..

Here is Damodoran’s view on TAM and probable market capitalization.

My. Gurley offer’s his own detailed response and provides a reasonable and plausible argument that Uber’s market opportunity might be 25X higher than Professor Damodaran’s take.  Let’s keep in mind that Mr. Gurley is an early-stage investor has much more access to actual data than Professor Damodaran.

I highly recommend reading both blogs to try and figure out where each person is coming from, and what you think is actually probable.

The reason I want you to think about these views are because that’s what the markets are like. A confluence of diverging views with actual positions based on their respective forecast.   These views coupled with the forces of bid and ask size, determines price at any given point in time.

Business Enterprise Value

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The Intersection Between the Value of an Enterprise, its Earnings, and the Value of its Tangible and Intangible Assets

Is there a Gap? Will it close?

Alas when it comes to the market, timing is everything.

What we try and discern is whether the difference between Intrinsic value and Price exists, if not, what seems to be higher, and what the future might bring.  Traditional tools for intrinsic analysis includes DCF, multiples, CAPM, Gordon Growth, Excess Return Models and the like.  What it ultimately brings is one/group of analysts perspective on risk, reward, and their idea of what investors are likely to buy into the company.  If you think that makes sense, take a look at $YELP or $GRPN and try to make sense of what people are paying for equity considering the financial performance of the Company.

Tools for pricing include multiples and comparables, charting and yes! technical indicators.   Your fundamental research can indicate what the stock should be trading at but what that fails to include is the raw emotion that traders and investors have in the market.  Takeaway: Just coz a stock should be trading at a certain price doesn’t mean that’s what the market is offering that to normal investors (Remember when $TWTR’s IPO was set by the analysts at $18-24 and when it finally got to the public it was around $40.)

The chart below has really helped me grasp an understanding between the differences of price and value.